A bank official said on Wednesday: "There have been some discussions with the caretaker government in Ramallah, but there has been no formal request from the Palestinian Authority."

After Hamas won the parliamentary election last week the United States and the EU threatened to cut off funding to the authority unless Hamas renounced violence and recognised Israel, increasing fears that the financial situation will worsen.

Israel halted a $55 million tax payment due to the Palestinian Authority on Wednesday because of the Hamas victory.

In an updated report released on Wednesday, the World Bank said the Palestinian Authority's fiscal position had become increasingly unsustainable because of "uncontained" government spending, including sharp increases in salaries and hiring staff.

Reform wrangle

The World Bank has managed a multidonor reform fund for the Palestinian Authority since 2004 and withheld a payment of $60 million in December because a series of reforms agreed with the Palestinians had not been completed.

However, the official said that if all 12 donors that contribute to the reform fund agreed, the money could be disbursed to the authority by waiving requirements for reforms.

A total of $310 million has been committed to the Public Financial Management Reform Trust Fund by the donors, of which $250 million had been disbursed in four installments by the middle of last year. The biggest contributors are the European Commission, Japan, Norway and Britain.

"The significant increase in public-sector salaries and public hiring is a setback with respect to the efforts of placing the PA on an orderly fiscal footing," the bank said.

"The PA has not committed to any mitigating measures to bring the fiscal situation under control."

Solid growth

In 2005, the Palestinian Authority's budget deficit reached about $800 million, of which $340 million was financed by donors in the form of direct budget support.

"Unless addressed promptly, deficits of this magnitude will compromise the proposals of rapid recovery by destabilising the Palestinian Authority's operations and by reducing the public and private resources otherwise available for productive investment," the World Bank said.

The bank's report estimated that economic growth in the West Bank and Gaza reached a solid 8% to 9% last year in the wake of a gradual economic recovery that began in 2003.

The Palestinian economy has withered since the start of an uprising against Israel in 2000, hampered by violence as well as mismanagement and corruption that have discouraged donors.

The bank said the Palestinian economy still operated well below its potential and unemployment remained high especially among youths.